EUR / USD
The Euro remained on the defensive in early Europe on Thursday with the break below 1.1500 against the dollar on Wednesday continuing to undermine confidence.
The EU Commission revised its 2021 GDP growth forecasts higher to 5.0% from 4.3% previously with 2022 GDP growth projected at 4.3%. The 2021 CPI inflation forecast was revised higher to 2.4% before slowing to 2.2% next year and 1.4% in 2023.
The overall impact was limited, especially with expectations that the ECB will maintain a very accommodative policy stance over the medium term.
The dollar continued to gain underlying support from Wednesday’s much higher than expected CPI inflation forecast with expectations that the Federal Reserve would have to take a more aggressive monetary stance. There was speculation that the tapering of bond purchases would be accelerated and that there would be an earlier than expected increase in interest rates.
There was also speculation that the Fed and Administration would be happy to see a firm dollar to help cap near-term inflation pressures.
Overall trading rages narrowed with no further major data releases during the day and a partial US holiday. The Euro was unable to regain significant ground and settled around 1.1460 amid expectations that yield differentials will undermine the single currency.
The dollar held firm on Friday with the currency index at the highest level since July 2020 while the Euro traded close to 15-month lows just below 1.1450.
US Treasury futures were little changed on Thursday with the 10-year yield holding around 1.57%. The partial US holiday curbed activity and the dollar was held just below the 114.00 level at the New York open.
Following the much higher than expected inflation data, markets will monitor comments from US Federal Reserve officials closely in the short term. In particular, asset prices will be very sensitive to hints over the potential timetable for an increase in interest rates.
Any Administration hints on whether Powell will be nominated for a second term as Fed Chair will also be monitored closely in the short term ahead of an expected announcement later this month. The dollar would be at risk of selling f Powell is not nominated for a second term.
Asian equity markets were able to make headway on Friday with an easing of immediate concerns surrounding China’s real-estate sector, although there were still important longer-term reservations. Overall, the dollar secured a limited net advance to around 114.20 with the Euro edging higher to the 130.70 area.
Sterling lost ground following the raft of UK data releases with further concerns that the underlying recovery was fading, especially as the September GDP data was boosted by healthcare spending. A faltering recovery would make it more difficult for the Bank of England to justify higher interest rates.
The latest quarterly trade data also recorded a small decline in exports to the EU while imports increased with a trade deficit of close to £18.0bn from £16.1bn the previous quarter. The underlying trade performance will continue unsettled medium-term Sterling confidence, especially with underlying trade tensions also persisting.
Sterling dipped to fresh 2021 lows around 1.3365 against the dollar with the Euro making limited gains. The UK currency did recover some ground during the day with the increase in domestic yields providing an element of protection from further selling.
Markets will remain on alert for comments from Bank of England officials given speculation that there will be a rate increase next month.
Sterling settled below 1.3400 against the dollar with the Euro around 0.8565. Dollar strength continued to dominate on Friday with Sterling around 1.3365 against the US currency. The Euro was just below 0.8560 with markets still on alert for comments from Bank of England officials and Haskel is due to speak later in the day.
The Swiss franc held firm in early Europe on Thursday, but gradually lost ground during the day. Although there was speculation that the National Bank could eventually tolerate franc gains, there was still a reluctance to take on the central bank in the short term given the threat of intervention, especially as the central bank has stepped-up franc sales during the past two weeks. Global inflation concerns are still likely to provide net support for the Swiss currency.
The Euro settled just above the 1.0550 level while the dollar peaked at 0.9225 before fading. The franc was marginally lower on Friday with the dollar around 0.9220.